Mechanical technical analytical systems are a product of the human desire for certainty. They are attempts to sell out to physical certainty processes which are emotional, not physical. They try to jam the facts of one world, the world of emotion, which we cannot see, into someone else world - the physical world which surrounds us. The two are incompatible, which is why mechanical trading systems at last fail, in spite of the most developed computers available. They work in a parallel universe, and the two do not meet.
Japanese Candlestick technical analysis does not suffer from the fundamental defects of a mechanical system. Nevertheless, it does not operate in a vacuum. Its starting point is the physical universe - the movements of stock prices and, in particular, the patterns which are left behind by price action. It then transfers that knowledge, straight through the eye, to the most perfect computer ever devised - the human brain - which interprets the emotional, psychological underpinnings of stock price movements and produces estimates of the next direction of prices.
There comes to mind the Crash of 1987, which was "unexpected" and "came out of the blue." It was no such thing. Had Japanese Candlestick analysis been in normal use in those days, skilled observers would have seen evidence of the psychology of the store and could have taken action to fly the worst of the decline. Yet, to this very day, experts who should know good are still trying to find physical "reasons" for the Crash, but have found none - because there are none.
Whereas mechanical systems denigrate the analytical capabilities of the human brain by excluding it from the analytical process, Candlestick analysis, on the other hand, celebrates it.
The eye, of course, is an extension of the brain. The real charm of Candlestick analysis is that it empowers the brain to elaborate the patterns which are presented to it, recognizing that price action in the stock store reveals the emotions and psychology of the traders who are participating at the time. It is nothing less than a deconstruction of the traders' mood, from which reasonable conclusions can be drawn about their next move.
The Candlesticks live for reversals of trend. They are champs at spotting reversals which are in the process of happening, or are about to happen. Some Candlestick pictures are clear as crystal. Others are less clear, but nevertheless throw off clues. Much of the time, no clear reversal pattern is evident.
It literally gets enchanting - and fun - when a less-than-perfect reversal pattern emerges, or when the clues are nevertheless somewhat tilted to the bullish side or to the bearish side. This, I think, is where some Candlestick proponents do their clients a disservice, in searching all the time for perfection or near-perfection in pattern formation. literally it is important to know and to be able to recognize the major patterns in their pure form. However, in my experience volumes of important and predictive data are presented by unorthodox patterns which are not shown in the proper textbooks but which, nevertheless, enumerate mountains of data regarding the fundamental psychology of the store and the next direction of trend.
So, why is it that proponents of mechanical trading systems take off from the analytical equation the finest computer ever devised? It's a strangeness to me. There is nothing that can, or ever will, coming the human brain in its capability to analyze the psychology of the store as revealed promptly in pictures - the Candlestick patterns. After all, the human brain is working in its own world here - the world of human emotion - which is a parallel universe to which mechanical systems and observers who all the time quest for physical, external "reasons" for store action have no entry door.
This is a world with respect to which the talking heads on Cnbc have no clue. But it's there, it's real, and I use it every day. You can, too. This is not rocket science, or in any place nearly as intricate as putting a lander on Mars. And it's so much fun to decipher the psychology of the market, and then to base your own trading decisions on that knowledge.
Don't naturally try to rely on the numbers. Rely on your own eye and on your own brain! You have in your head the most computer of all. You can do this. The Candles are easy to learn and a joy to use. A whole new world will open up for you, and you may never knew it exists!
